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Theoretical Notes on Bubbles and the Current Crisis

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  • Alberto Martin
  • Jaume Ventura

Abstract

We explore a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. We embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, we show how the model can account for: (i) a gradual and protracted expansionary phase followed by a sudden andsharprecession; (ii) the connection (or lack of connection!) between financial and real economic activity and; (iii) a fast and strong transmission of shocks across countries. We also use the model to explore the role of fiscal policy.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 519.

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Date of creation: Nov 2010
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Handle: RePEc:bge:wpaper:519

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Related research

Keywords: Bubbles; dynamic inefficiency; financial accelerator; credit constraints; financial crisis; pyramid schemes;

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  1. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
  2. Grossman, G.M. & Yanagawa, N., 1992. "Asset Bubbles and Endogenous Growth," Papers 160, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Aart Kraay & Jaume Ventura, 2005. "The Dot-Com Bubble, the Busch Deficits and the US Current Account," Working Papers 216, Barcelona Graduate School of Economics.
  4. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  5. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  6. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  8. Gourinchas, Pierre-Oliver & Farhi, Emmanuel & Caballero, Ricardo J., 2008. "Financial Crash, Commodity Prices, and Global Imbalances," Scholarly Articles 3229095, Harvard University Department of Economics.
  9. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
  10. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  11. Jaume Ventura, 2002. "Bubbles and Capital Flows," NBER Working Papers 9304, National Bureau of Economic Research, Inc.
  12. Jesús Fernández-Villaverde & Lee Ohanian, 2010. "The Spanish Crisis from a Global Perspective," Working Papers 2010-03, FEDEA.
  13. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  14. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
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